FINANCIAL SERVICES
Payroll tax on bank bonuses [Updated to include HMRC clarification]
Alistair Darling announced a temporary bank payroll tax of 50% levied on discretionary bonuses above £25,000 in his pre-budget report on 9 December 2009. The chancellor said the one-off tax on bankers’ bonuses is planned to apply until 5 April 2010. “The Government attaches great importance to tackling the remuneration practices that contributed to excessive risk-taking by the banking industry,” he said.
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The levy applies to retail and investment banks (including building societies), and to banking groups. It does not apply to non-banking companies outside of banking groups (for example, insurance companies, asset managers, stockbrokers etc.). Draft legislation setting out the scope of the new tax was published at the pre-budget report by HM Revenue & Customs in an overview of the legislation and explanatory notes on the provision. Further clarification on what entities are subject to the tax and how it will apply was subsequently issued by HMRC (see below).
DOCUMENT EXTRACT
Bank payroll tax
The government attaches great importance to tackling the remuneration practices that contributed to excessive risk taking by the banking industry. It announces, with effect from today, that where bank or building society employees are awarded discretionary bonuses above £25,000 in the period from the Pre-Budget Report to 5 April 2010, employers paying these bonuses will pay an additional bank payroll tax of 50% on the excess over this threshold. This one-off tax will not be deductible in computing the taxable profits of affected companies.
The tax will apply until 5 April 2010, but the government will consider extending the period of charge so that the tax remains in place until the relevant provisions of the Financial Services Bill come into force. Where there is evidence of avoidance schemes being put in place the government will take action to close those schemes.
--> Pre-Budget report, Alistair Darling, chancellor of the exchequer, 9 December 2009.
Source: www.hm-treasury.gov.uk/prebud_pbr09_press01.htm.
DOCUMENT EXTRACT ENDS
Bank Payroll Tax - Technical Note, Draft legislation and Explanatory Notes
This 31-page PDF document explains the new bank payroll tax that applies, broadly, to banks and building societies on awards of bonuses over £25,000 to or in respect of certain of its employees in the period from 9 December 2009 to 5 April 2010.
--> HM Revenue & Customs, 9 December 2009.
Source: www.hmrc.gov.uk/pbr2009/bank-pay-tech-note.htm.
The bank payroll tax announced at PBR 2009
Special announcement on financial companies within scope of new payroll tax and roles covered. It states: “Since PBR we have received a number of representations concerning the definition of a ‘bank’ used in the draft legislation. In particular we have received representations that the definition of a bank inadvertently catches companies which would not be regarded as a bank from a commercial or legal perspective. Having considered these, we think that the diversity of regulated investment activities undertaken by non-banking financial service groups in the UK means that the original definition of a ‘bank’ did not effectively exclude all the groups we intended to exclude. This resulted in a number of corporate groups inadvertently being brought within the definition of a ‘banking group’, and therefore within the scope of the bank payroll tax.”
--> HM Revenue & Customs, 18 December 2009.
Source: www.hmrc.gov.uk/pbr2009/bank-payroll-18-12.htm.
Bank payroll tax - responses to some questions
An eight-page PDF document providing general guidance via 27 frequently asked questions covering LTIPs, “relevant remuneration”, “banking employment” etc.
--> HM Revenue & Customs, 24 December 2009.
Source: www.hmrc.gov.uk/pbr2009/bank-payroll-faqs.pdf.
Commentary
PricewaterhouseCoopers LLP (PwC) welcomed “this step towards clarity”, announced by HMRC on 18 December 2009, but warned that uncertainty remains over the type of middle and back-office roles covered by the legislation and that an unlevel playing field may develop between people performing similar roles in different organisations.
Jon Terry, partner and head of reward, PwC, said: “The scope of the draft legislation was wider than the government intended as it caught companies that were not commercially or legally banks so this clarification will be well-received by the many brokerage businesses, private equity houses, commodities firms, asset management and hedge fund companies that should now be excluded from the tax.
“In the absence of further clarity, an unlevel playing field could develop as people performing similar roles in different organisations are subject to different payroll tax treatment – for example, asset managers in businesses which are part of a banking group are currently still within the scope of the tax. Organisations will obviously be concerned about the impact this will have on their ability to compete effectively.
“HMRC has said it will continue to work with representative bodies and others to clarify the scope and effect of the proposed legislation. There is particular uncertainty about the type of middle and back office roles caught and, until the revised draft legislation is published, this and other grey areas are making it difficult for firms to make commercial decisions.”
--> PricewaterhouseCoopers, 21 December 2009.
Want to know more?
If you require further information about this new tax, banks and their advisers should contact their HMRC customer relationship manager. Otherwise email: pbr2009.taxteam@hmrc.gsi.gov.uk, tel: 020 7147 0110.